The move comes as the problems facing the Chinese group Evergrande fuel investor concerns about the health of the real estate and credit markets.
China has injected more liquidity into its banking system in a sign that authorities seek to avoid a funding crunch amid a seasonal increase in demand for financing and the intensifying debt crisis in China Evergrande .
The People’s Bank of China on Friday added 90 billion yuan ($ 14 billion) of funds on a net basis under seven-day and 14-day repurchase agreements, the highest number since February. Today was the first time this month that it added more than 10 billion yuan of short-term liquidity to the banking system in a single day.
The move comes as issues facing China Evergrande Group fuel investor concerns about the health of the real estate and credit markets. Adding to this stress is a seasonal spike in demand for liquidity, with banks reluctant to lend towards the end of the quarter before regulatory checks. Liquidity also tends to decrease at this time of year before a week’s vacation in early October.
“Avoiding a systemic liquidity crunch is the top priority for the PBOC and it has the means to do so,” wrote economists at Societe Generale SA led by Wei Yao in a research note. “A Lehman-style financial market meltdown is not our main concern, but a prolonged and severe economic downturn seems more likely.”
Yet the PBOC’s operations have yet to lower money market rates. The seven-day repo rate, an indicator of interbank borrowing costs, jumped 14 basis points on Friday to 2.4%, the highest since June 30.
The concern over Evergrande comes at a time when the Chinese economy is already slowing. Strict movement controls put in place to curb the Covid-19 outbreaks have hurt retail spending and travel, while measures to cool house prices have also taken their toll. On Wednesday, the country reported a sharper-than-expected slowdown in retail sales in August, along with weaker growth in industrial production and capital investment.
The PBOC seeks to strike a balance between stimulating the economy and ensuring that its liquidity injections do not lead to asset bubbles. Since July, it has refrained from adding additional medium-term liquidity as the policy loans mature.
On Friday, the central bank injected 50 billion yuan through its seven-day reverse repurchase agreements, and an additional 50 billion yuan through 14-day contracts, which have not been used since February. Some 10 billion yuan matured on Friday.
“It is fair to say that the Evergrande situation and its repercussions on the wider real estate market will have a far greater direct impact on Chinese growth than any other regulatory crackdown,” said Alvin Tan, head of the foreign exchange strategy in Asia at Royal Bank. from Canada to Hong Kong. “I would not be surprised if the PBOC acts to contain the fallout in the money markets.”
The uncertainty over Evergrande prompts Chinese observers to rule out potential worst-case scenarios as they contemplate the pain the Communist Party is willing to tolerate. The pressure to intervene is increasing as signs of financial contagion increase.
Many industries could be exposed to credit risk if Evergrande defaults, Fitch Ratings warned. He said small banks and vulnerable developers would be hit the hardest. With more than $ 300 billion in liabilities, Evergrande’s liquidity stress is fueling concerns across the Chinese real estate industry. Morgan Stanley and Goldman Sachs both lowered forecasts for the industry, citing the potential for an Evergrande default to upset its suppliers, other developers and financial markets.
It all depends on the extent of the real impact on the wider real estate sector, which is critical for the Chinese economy. Risks increase that consumers could fall back further as the company falls behind on promised construction work and faces refunds on wealth management products sold to individuals.